US embassy cable - 04SANAA2783

UNCLAS SECTION 01 OF 02 SANAA 002783 
 
SIPDIS 
 
STATE FOR NEA/ARP. STATE PASS TO USTR JASON BUNTIN. 
 
E.O. 12958: N/A 
TAGS: ECON, PGOV, YM, KMPF, ECON/COM 
SUBJECT: INVESTMENT CLIMATE CHANGES, CHALLENGES AHEAD FOR 
FOREIGN INVESTORS IN YEMEN 
 
REF: SANAA 2521 
 
1. Summary.  Corruption and non-implementation of existing 
laws and regulations make the investment climate appear 
nontransparent and arbitrary to most foreign investors. 
Concerns over security and ROYG non-movement on a critical 
economic reform package (ref A) create an inhospitable 
picture for investors.  Although the ROYG adopted in the late 
1990s marginal measures to reduce state intervention in 
commercial activities, the ROYG must now focus on economic 
diversification, civil service reform, eliminating the last 
of the petroleum subsidies, and attracting foreign 
investment.  A September 2004 World Bank report warned of the 
imminent collapse of the economic reform package that the 
country has been implementing since 1995.  Last month's 
report stressed unsatisfactory and tardy reform 
implementation.  Most recently, a September 30 Presidential 
decree significantly strips down foreign investors' rights in 
Yemen gained by the 2002 Investment Law.  End Summary. 
 
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Trade Policy Devolution 
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2. Excessively complex customs procedures make foreign 
investors wary of Yemen,s commercial climate and act as a 
significant trade barrier.  Customs reform is one of the key 
areas of concern cited by the World Bank, foreign investors 
and donors.  Most foreign investors are forced to obtain the 
intermediary services of a local Yemeni agent to navigate the 
complicated and nontransparent system of corruption, 
government regulations, and business practice in Yemen. (See 
septel on Customs Laws.) 
 
3.  While there are no provisions in the investment code 
regarding agency, many foreign firms work with Yemeni agents. 
 Econ/Commoff has spoken to a few of these firms who act as 
an agent for Western companies.  These businesspeople mention 
that American firms request that they sign an agreement that 
they will adhere to the US Foreign Corrupt Practices Act, 
with full knowledge and implicit understanding that the US 
company has hired the agent to facilitate their joint 
commercial interests in Yemen by whatever means necessary. 
As is common practice in corruption-ridden economies, 
American firms hire agents as an additional legal safeguard 
against allegations of contributing to corruption in foreign 
countries. 
 
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Investment Law and Recent Changes 
--------------------------------- 
 
4. The ROYG hopes that by streamlining investment laws and 
procedures, Yemen will attract more foreign investment.   In 
2002, the General Investment Authority (GIA) was given a new, 
expanded mandate to promote and regulate investment.  The 
2002 Investment Law granted nearly equal treatment to all 
investors, domestic and foreign, yet a Presidential decree in 
recent weeks may significantly threaten this treatment (See 
para 6).  While the written laws and regulations encourage 
foreign investment, in practice, laws and regulations are not 
enforced equally nor consistently.  The foreign investment 
community in general does not view the GIA as an effective 
promotion nor regulation body.  While advocating for American 
companies, proposals, it has become clear to the Embassy 
that the GIA cannot approve or influence approval of major 
investment projects in Yemen without the verbal or written 
approval from more powerful political entities, such as the 
President for petroleum projects.  The GIA situation 
represents a basic fact of political life in Yemen where 
decision-making power has been centralized to a few key 
political figures, without whose approval most projects and 
initiatives cannot move forward. 
 
5. Most foreign investment focuses in the oil and natural gas 
sector.  Production-sharing agreements (PSAs) are negotiated 
with all exploration and production activity by the Ministry 
of Oil and are usually allocated by tender.  A few sectors 
are prohibited from foreign investment: arms and explosives, 
banking, currency exchange, industries that could damage the 
environment, and wholesale and retail imports.   As for 
capital flows, the ROYG does not restrict payments and 
transfers in and out of country for foreign investors; 
foreign exchange accounts are permitted. 
 
6. On September 30, President Ali Abdullah Saleh issued a 
Republican decree amending Article 28 of the Investment Law 
32/1991, banned non-Yemenis from conducting business in the 
Republic of Yemen &unless they have Yemeni partner(s) with a 
capital share of no less than 51%.8  The law excludes 
non-Yemenis working in small businesses.  Foreign 
businesspeople in Yemen report to the Econ/Commoff that the 
GIA has already notified them that this amendment will impact 
their proposed investments before the GIA. 
 
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Ineffective Commercial Courts 
----------------------------- 
 
7. Discussions regarding investment cannot be complete 
without serious consideration of the commercial court system. 
 Resolution of commercial disputes can be reported to take as 
much as seven years and even then, decisions are not 
regularly enforced by law enforcement.  One businessman 
shared with the Econ/Commoff that when the police went to 
enforce a court order at a factory, its owner commanded his 
private guards to shoot back at the police.  Outgunned, the 
police retreated and declined to re-attempt the court order 
enforcement. 
 
8. Most businesspeople resort to extra-judicial resolution 
arenas, such as consultations with tribal sheikhs and others, 
to solve their business disputes. In the last year, the Taiz 
Chamber of Commerce initiated arbitration services for 
businesspeople in its district.  Arbitration programs in Taiz 
and Sanaa are making some progress and several donors are 
considering expanding projects to help improve Yemen,s 
investment climate. 
 
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Comment 
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9. The Embassy faces a difficulty in encouraging investors to 
come to Yemen.  Without a highly-attractive incentive, such 
as Yemen,s natural gas and oil resources, most foreign 
companies will find the investment climate unappealing.  It 
is widely known that even the major Yemeni businesses take 
their earnings and invest abroad, not within Yemen.  When 
examining the investment laws, Yemen rates relatively well 
but when it comes to practice of implementing the 
regulations, promoting foreign investment, the ROYG has not 
succeeded in combating corruption and creating a fertile 
investment climate.  End Comment. 
KRAJESKI